railway reform in the western balkans - world...

Report No. xxxxxx-ECA Railway Reform in the Western Balkans Transport Unit, Infrastructure Department Europe and Central Asia Region December, 2005

Document of the World Bank

Railway Reform in the Western Balkans

CURRENCY EQUIVALENTS

Currency Unit EURO Exchange Rate US$1 = 1.21 EURO (June 30th 2005)

Currency Unit Albanian Lek

Exchange Rate US$1 = 102.46 ALL (June 30th 2005)

Currency Unit Bosnia and Herzegovina Convertible Mark Exchange Rate US$1 = 1.615 BAM (June 30th 2005)

Currency Unit Croatian Kuna

Exchange Rate US$1 = 6.04 HRK (June 30th 2005)

Currency Unit Macedonian Denars Exchange Rate US$1 = 47.85 MKD (June 30th 2005)

Currency Unit Serbian Dinars

Exchange Rate US$1 = 68.17 CSD (June 30th 2005)

WEIGHTS AND MEASURES Metric System

FISCAL YEAR

January 1st December 31st

Vice President, Europe and Central Asia: Shigeo Katsu Country Director, ECCU4: Orsalia Kalantzopoulos

Sector Director, ECSIE: Peter D. Thomson Sector Manager, Transport: Motoo Konishi

Task Team Leaders: Martin Humphreys/Martha Lawrence

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ABBREVIATIONS AND ACRONYMS

CARDS Community Assistance for Reconstruction, Development and Stabilization CIM International Consignment Note for rail transport under COTIF CIS Community of Independent States CMEA Council for Mutual Economic Assistance (also known as COMECON) COTIF Convention Concerning the International Transport of Goods by Rail, 1980 DMU Diesel Multiple Unit EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia, an administrative region of the World Bank ECMT European Conference of Ministers of Transport (Part of OECD) EIB European Investment Bank EMU Electric Multiple Unit EU European Union ERTMS European Rail Traffic Management System ETCS European Train Control System GETS General Electric Transportation Systems GDP Gross Domestic Product GNI Gross National Income GSM Global System for Mobile communications HSH Hekurudhat Shqiptare, or Albanian Railways HZ Hrvatske eljeznice, or Croatian Railways IBRD International Bank for Reconstruction and Development, the World Bank Group IDA International Development Agency, the World Bank Group IFI International Financial Institutions ISG Infrastructure Steering Group KFOR NATO-led force in Kosovo MoU Memorandum of Understanding MZ Makedonski eljeznici, or Macedonian Railways OECD Organization of Economic Co-operation and Development OSJD Organization for Railways Cooperation, comprises CIS countries PETrAs Pan-European Transport Areas PHARE Programme of Community aid to central and east European countries PSO Public Service Obligation PSC Public Service Contract REBIS Regional Balkans Infrastructure Study RSC Regional Steering Committee SaM Serbia and Montenegro SAP Stabilization and Association Process SEE South East Europe SECI Southeast European Cooperation Initiative SEETO South East Europe Transport Observatory SMGS Agreement on International Railway Freight Communications, used in OSJD SOE State Owned Enterprise SME Small and Medium Enterprises TEN Trans European Network TERFN Trans-European Rail Freight Network TEU Twenty-foot equivalent unit (measurement for containerized cargo) TIRS Transport Infrastructure Regional Study

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http://www.hznet.hr/


UNECE United Nations Economic Commission for Europe UNMIK United Nations Interim Administration Mission in Kosovo ZCG Zeleznice Crne Gore, or Montenegrin Railways ZFBiH Zeljeznice Federacije Bosne i Hercegovine, or the railways of the Federation of

Bosnia and Herzegovina, ZRS Zeljeznice Republike Srpske,or Republika Srpska railways ZS Zeleznice Srbije, or Serbian Railways ZTP Zheleznichko Transportno Preduzchne Beograd, Former Serbian Railways

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TABLE OF CONTENTS

Abbreviations and Acronyms....................................................................................................................................... iii List of Figures ................................................................................................................................................................ vi List of Tables................................................................................................................................................................. vii Acknowledgments........................................................................................................................................................ viii Executive Summary.........................................................................................................................................................9

The Challenge ........................................................................................................................................................... 9 The Reform Process ................................................................................................................................................ 11

Introduction & Background.........................................................................................................................................13 Purpose of the Study ............................................................................................................................................... 13 Changing Transport Demand .................................................................................................................................. 14 Institutional Context for the Railway Sector ........................................................................................................... 16 Core Railway Network in South East Europe....................................................................................................... 17 Macroeconomic Context ......................................................................................................................................... 19

The Railways of the Western Balkans Region ............................................................................................................22 Albanian Railways (HSH)....................................................................................................................................... 22 The Railways of Bosnia & Herzegovina (ZFBiH and ZRS) ................................................................................... 25 Croatian Railways (HZ) .......................................................................................................................................... 29 UNMIK Railways, Kosovo ..................................................................................................................................... 31 Macedonian Railways (MZ).................................................................................................................................... 34 Montenegrin Railways (ZCG)................................................................................................................................. 37 Serbian Railways (ZS, formerly ZTP)..................................................................................................................... 40

Analysis of Key Issues And Performance of the Western Balkans Railways...........................................................45 Railway Traffic ....................................................................................................................................................... 45 Financial Performance............................................................................................................................................. 52 Operational Performance......................................................................................................................................... 55 Institutional and Organization Structure.................................................................................................................. 61

Reform Options .............................................................................................................................................................64 Reform of Railway Infrastructure ........................................................................................................................... 65 Reform of Railway Operators ................................................................................................................................. 66 Reform of Government Support for Railway .......................................................................................................... 72 Reform of Regional Relationships .......................................................................................................................... 73 Reform Recommendations for Each Railway ......................................................................................................... 74

References ......................................................................................................................................................................78 Annex A The Institutional Context For the Railway Sector...................................................................................86

The Acquis Communautaire .................................................................................................................................... 86 The Early European Union Legislation 1990-2001................................................................................................. 86 The EU White paper: European Transport Policy for 2010: Time to Decide.......................................................... 89 The ECMT Acquis................................................................................................................................................... 95

Annex B The Defined Core Network and Planned Extensions ............................................................................99 Background ............................................................................................................................................................. 99 The Genesis of the Core Network ......................................................................................................................... 102

Annex CRail Infrastructure Access Pricing..........................................................................................................107

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LIST OF FIGURES

Figure 1 Passenger and Freight Traffic of Western Balkans Railways .........................................................15 Figure 2 Fiscal deficit in the Western Balkans countries 2000-2007 (% of GDP) ........................................20 Figure 3 Traffic Carried by Albanian Railways (Million Traffic Units) .......................................................22 Figure 4 The Railway Network of Albania.......................................................................................................24 Figure 5 Traffic Units carried on Bosnia and Herzegovina Railways (1990-2004).......................................26 Figure 6 The Railway Network of Bosnia and Herzegovina...........................................................................27 Figure 7 Traffic Carried by Croatian Railways 1990 2004 (Million Traffic Units)...................................29 Figure 8 The Railway Network of Croatia .......................................................................................................30 Figure 9 Rail Network of Kosovo (shown within Serbia)................................................................................32 Figure 10 Macedonian Railways Traffic Carried 1990-2004 (Million Traffic Units)...................................35 Figure 11 The Railway Network of Macedonia ...............................................................................................36 Figure 12 Montenegrin Railways Traffic Units Carried 1990-2004 (Million Traffic Units)........................38 Figure 13 The Railway Network of Serbia and Montenegro..........................................................................39 Figure 14 Serbian Railways Traffic Units Carried 1990-2004 (Million Traffic Units) ................................41 Figure 15 The Railway Network of Serbia .......................................................................................................43 Figure 16 Share of passenger and freight traffic for Western Balkans Railways (Traffic Unit-km, Train-

km) ....................................................................................................................................................................45 Figure 17 Passenger traffic for Western Balkans Railways 1990-2004 (Million passenger-km).................46 Figure 18 Freight traffic for Western Balkans Railways 1990-2004 (Million Ton-km) ...............................48 Figure 19 Average Length of Haul for Freight for Western Balkans Railways and Comparators in 2004

(Km)..................................................................................................................................................................50 Figure 20 Railway Subsidy as a Share of Government Expenditure .............................................................53 Figure 21 Railway Subsidy per Passenger-km in Purchasing Power Parity Terms (2003 unless indicated)

...........................................................................................................................................................................54 Figure 22 Traffic Units Per Track-km for Western Balkans railways and Benchmark railways (2003/4) 56 Figure 23 Locomotive-km per Mainline Locomotive for Western Balkans Railways and Benchmarks

(2004) ................................................................................................................................................................58 Figure 24 Wagon-km per wagon for Western Balkan and benchmark railways (2004)..............................59 Figure 25 Labor productivity indices for Western Balkans and benchmark railways (2003 unless

indicated) ..........................................................................................................................................................60

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LIST OF TABLES

Table 1 A comparison of the context and performance of EU railways and SEE Railways (2002) ............14 Table 2 Western Balkans Countries Actual and Projected Real GDP Growth 2002-2006 (%) ...............20 Table 3 Network size and length of electrified line for ZFBiH and ZRS (YEAR)........................................28 Table 4 UNMIK Railway Lines in Kosovo .......................................................................................................33 Table 5 UNMIK Railways Rolling Stock age, productivity and fleet size ..................................................34 Table 6Average loadings and average trip lengths (kms) by railway (2003 unless indicated otherwise) ...47 Table 7 Freight volume (Ton-km), Average Haul (km) and Traffic Type for Western Balkans Railways

(2004 unless otherwise indicated) ...................................................................................................................49 Table 8 Annual Income Statement for the Railways of the Western Balkans Region..................................52 Table 10 Western Balkans Composition and Condition of Railway Infrastructure (2004) .........................55 Table 11 Locomotive fleet description for Western Balkans railways (2004) ...............................................57 Table 12 Labor size and productivity indices for Western Balkans railways (2003 unless indicated) .......60 Table 13 Institutional Status of the Western Balkans Railways (2004) .........................................................62 Table 14 Organizational Status of Western Balkans railways 2004 ..............................................................63 Table 15 Recommended Reforms .....................................................................................................................74

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ACKNOWLEDGMENTS

This paper was prepared by Martin Humphreys (Senior Transport Economist) and Martha B. Lawrence (Senior Transport Specialist), Task Team Leaders, Gerald Ollivier (Transport Specialist, ECSIE), Cordula Rastogi (Extended Term Consultant), Julia Tomova (Junior Professional Associate), and Julie Morel (Short Term Consultant) from the Infrastructure Department (ECSIE) within the Europe and Central Asia Region of the World Bank. Thanks are also given to Motoo Konishi (Sector Manager, Transport, ECSIE), together with Peer Reviewers, Paul Amos (Transport Advisor, TUDTR), and Lou S. Thompson (Consultant, former Railways Advisor) and for their helpful and substantive contributions to the draft of this paper. Useful comments were also provided by Ardo Hansson (Lead Economist, ECSPE) and Mathew Verghis (Senior Economist, ECSPE). The team would also like to gratefully acknowledge the formal and informal contributions representatives of the respective Governments and Railways of the Western Balkans, who assisted during the course of the study.

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EXECUTIVE SUMMARY

1. This study examines the challenges facing the railways of the Western Balkans region. The regions railways have many common problems including small size and fragmented railway service that are best addressed through common solutions. The similarities of the countries in terms of their shared history, geography, socio-economic characteristics and common aspiration to join the European Union also support a regional approach to addressing shared problems.

2. This study was commissioned to provide an outline for railway reform in the region. The study reviews the environment in which the railways operate, including the changing demand for rail services, the institutional and the macroeconomic context. It assesses the railways financial and operational performance, benchmarked against some appropriately selected international railways. It reviews the current status of reform in each country, and outlines a broad reform strategy for the railway sector in the Western Balkans.

3. This study is intended for the Western Balkans governments, railways and other interested stakeholders including the European Union, other international financial and donor institutions, and the current and potential users of the railway networks of the Western Balkans.

THE CHALLENGE

4. In 2004, the Bank produced a regional framework paper for Southeast Europe1, which synthesized the contents of sector reports in roads, railways and inland waterways together with ongoing work in trade and transport facilitation and road safety. A major issue that emerged in that paper was the poor performance of the railways of the Southeast Europe region, particularly in the Western Balkans countries.

5. The framework paper starkly illustrated the problem: How to sustain a railway network of much the same network density (track km per sq. km) as Western Europe, with less than half the traffic density, a third of the total labor productivity, and a fraction of the per capita income? Continuing the existing, often substantial, level of operating subsidy together with the provision of projected investments needs is becoming increasingly incompatible with the current fiscal and debt position of the Western Balkans countries.

6. In the Western Balkans region, transition, conflict and the closure of old, uneconomic, heavy industry has caused railway traffic to decline drastically. The railways of the Western 1 World Bank, (2004c).

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Balkans countries used to carry about four times as much passenger traffic as they do nowabout 10 billion passenger-km in 1990 versus 2.5 billion passenger-km in 2004. In freight they handled almost 3 times as much as they do todayabout 20 billion ton-km in 1990 versus 7 billion ton-km in 2004.2

7. In addition, the atomization (the Balkanisation) of the former Yugoslavian Railways (JZ) has fragmented rail service, leading to reduced competitiveness. The average length of haul for freight in the region is now very short, from 74 km for Albania to 290 km for Serbian Railways. Since rail is typically competitive with road for either very high volume movements or for long distance movements, the railways as stand-alone entities have limited competitive services, and must integrate their service offerings with neighboring railways to be competitive. This is a big challenge: a train movement from Ljubljana to Istanbul, for example, now involves four border crossings, and the co-ordination of five railways.

8. The level of competition is increasing. With rising incomes and significant investment in the road networks, freight and passengers are shifting to the road-based modes. In addition, the Western Balkan countries are adopting, as part of the acquis communautaire, open access regimes for their rail infrastructure. This will enable European rail freight operators to enter the market and cherry pick the most profitable rail traffic.

9. Railway assets were damaged in the conflict and little investment was made in the last 15 years. The railways survived by eating their assets, providing the lower volume of service demanded by using the youngest rolling stock and allowing the infrastructure to deteriorate. The youngest are no longer young, however, and deteriorated track impairs service quality and safety. The railways have a pressing need to renovate assets.

10. The Western Balkans railways also suffer from poor resource productivity. The railways were built and staffed to carry much more traffic than now, and the railways have failed to fully adjust resources to the reduced production. Infrastructure utilization is quite low, especially for the smaller railways. Rolling stock utilization and staff productivity is also low, compared to the European benchmark railways.

11. The railways, in their present form, are straining government budgets with their need for operating and capital subsidies. For example, operating subsidies alone to Serbian Railway consumed nearly one percent of GDP and two percent of government expenditure in 2003, with no funds available for capital investment. For Croatia, the comparable operating subsidy figures are 0.5 percent of GDP and 0.9% of government expenditure. In addition, the railway in Croatia received US$236 million in capital subsidy in 2003, bringing the total subsidy that year to US$378 million, or 1.3 percent of GDP.

12. Given the challenging fiscal situation, the level of public funds spent on railways is a serious concern. The level of subsidy for Western Balkans railways is comparable to benchmark European railways. Nonetheless, given that the state sector is overlarge in

2 All tons and ton-km in this report are metric tons.

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Western Balkans countries, and that governments have many other pressing priorities, a European level of subsidy for railways is not affordable.

THE REFORM PROCESS

13. Railway reform in the Western Balkans must balance several competing objectives. The reform should aim to reduce the subsidy needs, while:

Providing for appropriate levels of safe and effective rail transportation to support economic activity in each country and the region;

Allowing for efficient provision of necessary social services, e.g., passenger services or community access; and

Producing an economically viable rail sector that is able to compete effectively and renew its assets.

14. The achievement of these objectives will be a tremendous challenge. It will require difficult choices to be made both at the organizational level and at the policy level. The following paragraphs outline a reform process consistent with these objectives.

15. Railway Infrastructure: The primary emphasis in the reform process for the network should be rationalization, cost reduction and a harmonized system of access prices. The size of the infrastructure should better reflect current and forecast traffic, with a commensurate reduction in recurrent expenditures. Infrastructure access prices should be harmonized across neighboring national networks to prevent the emergence of barriers to competition, and at a level to recover the difference between the total costs of network provision and the contribution from the national budget.3

16. Railway Operators. The primary emphasis in the reform process for the railway operators should be commercialization and/or privatization. Commercialization would include cost reduction, labor retrenchment, improved marketing, a profit center organization structure, more rigorous and objective investment planning, and divestiture of non-core activities. The government should consider privatizing the freight operators as a way to facilitate and speed these changes.

17. Government Support for Railways. The primary emphasis in reform should be improved public service tendering and contracting. To the degree affordable, government will continue to subsidize socially necessary but loss-making services. The emphasis should be on designing this process to obtain high value for public money. This is accomplished by: (a) prioritizing the social services to be provided according to economic value and only buying those with high value relative to cost; and (b) tendering the provision of those services. Before tendering provision of services, government should consider whether the service could be provided less expensively by another mode. In many low density markets, a 3 The reasons are discussed in the earlier Framework Paper, and expanded upon subsequently, in a recent paper for the ECMT, see Nash, Mathews and Thompson (2005).

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tendered bus service could provide higher frequency, higher quality services for a fraction of the cost of providing rail service.

18. Regional Relationships. An additional element in the reform process should be the development/introduction of arrangements to support regional rail services. This could include contractual arrangements for the joint marketing of services, the pooling of equipment for a particular service, through running of locomotives and drivers, and/or the establishment of joint ventures to operate international services. In operations, it may range from improved document and information exchange to assigning higher dispatch priority to international train services. None of these measures would be expected to require significant investment, and all could be introduced by the railways at an early stage.

19. Selective investment. These reforms must be supported by selective capital investment that renews the right railway assets. The right assets are those that the downsized, self-sustaining railway undertakings would choose in a rigorous and objective capital planning process. Such assets will have strategic priority, and a high financial or economic return.

20. The World Bank and other International Financial Institutions (IFIs) need to ensure that their lending remains prudent and supports high yielding investments which help the railways to improve efficiency and reduce costs. For this reason, any proposed investment must be carefully scrutinized and found to satisfy quality standards within an adequate framework of sectoral reforms, regulation, and cross-country cooperation. Even after these microeconomic criteria have been met, lending decisions will also need to take into consideration the countrys macro-fiscal constraints and capacity to incur additional debt. Investments which meet these criteria should help shrink railway subsidy over time, gradually reducing the governments financial commitments for railways, while improving economic efficiency and growth prospects.

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INTRODUCTION & BACKGROUND

PURPOSE OF THE STUDY

1. This study examines the challenges facing the railways of the Western Balkans region. The region is defined in this study as Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia, and Serbia and Montenegro, including Kosovo (hereafter Kosovo). The regions railways have many common problems including their limited size and fragmented nature that are best addressed through common solutions. The similarities of the countries in terms of their shared history, geography, socio-economic characteristics and common aspiration to join the European Union also support a regional approach to addressing shared problems.

2. This perspective can be seen in a number of earlier World Bank initiatives contributing to the reintegration and rebuilding of the regional economy after the conflicts of the 1990s. Within infrastructure, they include the establishment of a regional market for trading in energy4 and a regional trade and transport facilitation5 project (TTFSE). Regional initiatives are necessary to address shared problems and reduce barriers to regional transport markets (e.g. regulations inhibiting the through running of locomotives). When they are economically viable and consistent with national priorities, regional initiatives complement, and indeed enhance, national reform initiatives.

3. In 2004, the Bank produced a regional framework paper for Southeast Europe6, which synthesized the contents of sector reports in roads, railways and inland waterways together with ongoing work in trade and transport facilitation and road safety. The Framework Paper compared some basic indicators of railway network sustainability in the SEE region with EU averages. Railway network density (and to a lesser extent population density) in the SEE region and in the EU countries are not greatly dissimilar, although wide internal variations exist in both blocs. (See Table 1 which has been reproduced from the earlier paper.) Traffic density, productivity and per capita national income, however, are much lower in the SEE region than in the EU.

4 World Bank, (2004d). Framework for the Development of Regional Energy Trade in South East Europe, Energy and Mining Discussion Paper No.12, Washington D.C. 5 See World Bank, (2004c). A Framework for the Development of the Transport Sector in SE Europe, Europe and Central Asia Region of the World Bank, Washington D.C. for a recent summary of trade and transport facilitation activities in the region. 6 World Bank, (2004c).

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Table 1 A comparison of the context and performance of EU Railways and SEE Railways (2002)

European Union

The Western Balkans

Population density (persons/000sq km) 106 92 Route density (rail route-km/000sq km) 44 42 Traffic density (000 traffic units/rail route-km) 3670 1640 Labor productivity (000 traffic units/rail staff) 650 223 Gross National Income ($000/capita 2003) 21.1 1.8 Source: WB Railway Database 4. The framework paper starkly illustrated the problem: How to sustain a railway network of much the same network density as Western Europe, with less than half the traffic density, a third of the total labor productivity, and a fraction of the per capita income? Continuing the existing, often substantial, level of operating subsidy and providing for projected investments needs were becoming increasingly incompatible with the fiscal and debt position of the Western Balkans countries.

5. With decision makers unable, or unwilling, to identify and focus resources on those market segments where rail might have a viable future, declining resources were spread ever more thinly on the whole of the existing rail network. The posited outcome was a patchwork approach, with different levels of efficiency, safety and service across the network. Such an approach was acknowledged as being unlikely to provide the level of service demanded by national and international transporters in a market economy, jeopardizing the sustainability of the whole sector.

6. This study was commissioned to provide an outline for railway reform in the region. The study reviews the environment in which the railways operate, including the changing demand for rail services, the institutional context and the macroeconomic context. It analyzes the railways financial and operational performance, using a number of pre-defined international benchmarks. It reviews the current status of reform in each country, and outlines a broad reform strategy for the railway sector in the Western Balkans.

CHANGING TRANSPORT DEMAND

7. The railways of the Western Balkans countries used to carry about four times as much passenger traffic as they do nowabout 10 billion passenger-km in 1990 vis-a-vis 2.5 billion passenger-km in 2004. (See Figure 1) In terms of freight carried, they used to carry almost 3 times the traffic as they now doabout 20 billion ton-km in 1990 versus 7 billion ton-km in 2004. As a specific example, the railways in Bosnia and Herzegovina carried 25 million tons of freight, and 13 million passengers in 1990. By 2004 this had had fallen to just under 6 million tons and just over 1 million passengers7.

7 Bosnia and Herzegovina Railways Public Corporation (2005).

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Figure 1 Passenger and Freight Traffic of Western Balkans Railways

Source: Study data

Western Balkans Railway Traffic

0

5,000

10,000

15,000

20,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Traf

fic U

nits

(mill

ions

)

Passenger-kmTon-km

8. Recent studies suggest modest or little growth in rail demand in the region. The Regional Balkans Infrastructure Study (REBIS)8 estimates that rail traffic will grow at between 60 and 140 percent between 2001 and 2025, or an annual rate of 2.5 to 5.8 percent (which is close to current growth). The earlier Transport Infrastructure Regional Study (TIRS)9, which reported in March 2002, projected little growth in rail traffic over the same period. The TIRS projection reflected that much rail traffic volume involved the movement of primary commodities or the output of the heavy industrial sectors, which were undergoing restructuring, privatization and retrenchment.

9. The change in the structure of the market, and the nature of the goods being transported, together with considerable investment in road infrastructure and rapid motorization, means that the scale of the former market is unlikely to be recovered for some time, if ever. Increasing per capita income is also likely to contribute primarily to further increases in vehicle ownership and use, rather than increased demand for rail transport per se.

10. These trends mean that the railway is likely to be a modest player in the transport sector in the region, except in a few market segments, and that current market share is likely to decline further. Rail currently accounts for 32 percent of public passenger transport in Croatia,10 10 percent in Serbia,11 3 percent in Albania12 and low proportions in the remaining 8 Cowi (2003). 9 Louis Berger (2002). 10 Croatia Central Bureau of Statistics, Statistical Information 2004. 11 Serbia and Montenegro Statistical Office, Statistical Pocket Book 2004, p. 43.

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countries. These shares exclude the use of the private carwhich if included would significantly reduce rail market share. The comparable market share for rail, in terms of passenger-km, is 6.6 percent for the EU15 countries, and 3.4 percent in Portugal, 5.5 percent in the United Kingdom, and 7.4 percent in Denmark.

INSTITUTIONAL CONTEXT FOR THE RAILWAY SECTOR

11. The institutional framework for the railway sector in the region is defined to a significant extent by the European Union, and the requirement and desire of the countries to take on the obligations of membership and harmonize with the acquis communautaire. Approximately 10 percent of the legislation included in the acquis is directly related to the transport sector. Preparation for accession not only requires the adoption of this legislation by each of the countries, but also requires that each has an adequate level of administrative capacity, and the capacity to prepare for the introduction of forthcoming directives.

12. The transport acquis communautaire contains all the relevant Directives, Regulations and Decisions, together with all principles of law and interpretations of the European Court of Justice, all international transport agreements to which the EU is a party, including what is now termed as the ECMT acquis13, and all relevant Declarations and Resolutions of the Council of Ministers. A review of the components of the acquis communautaire and the ECMT acquis, as they pertain to the railway sector is presented in Annex A. The following paragraphs summarize the key elements.

13. The acquis require that countries must separate railway infrastructure from railway operations. This may be done on an accounting basisorganizational and institutional separation is optional. The infrastructure is operated by an infrastructure manager that must have responsibility for its own management, administration and internal control. The infrastructure manager must have a business plan which is designed to ensure financial equilibrium and the optimum use of infrastructure. The infrastructure manager must publish a network statement, which describes the condition and limitation of the network, details of the charging scheme, rules governing the capacity allocation, and priority rules which apply in case of conflicting demand14.

14. The infrastructure manager must charge a track access fee for the use of the railway infrastructure. This fee should be calculated in a non discriminatory manner. The calculation may also take into account the mileage, the composition of the train and any specific requirements in terms of such factors as speed, axle load and the degree or period of utilization of the infrastructure. If the infrastructure manager is independent from railway undertakings, the infrastructure manager can establish the charging framework. If the infrastructure manager is affiliated with a railway undertaking, the charging framework must

12 Louis Berger (2005), Executive Summary Page 11. 13 Which has recently been slimmed down to an essential 120 Resolutions, Declarations, Conclusions and Recommendations etc. See ECMT, (2003) for more information.14 The contents of the network statement are defined in Annex 1.

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be established by an independent body. Each member state must establish an allocation body that will allocate infrastructure on a fair and non-discriminatory basis.

15. Railway undertakings (passenger and freight operators) must be administered on a commercial basis, with defined public service obligations (PSO), or public service contracts (PSC), for socially necessary services. A safety certificate must be issued for each operator. Railway undertakings meeting a series of conditions, can apply for a license that would be valid throughout the EU territory, with the intention of facilitating international access and hence competition.

16. Railway undertakings that are established in the member states must be granted access to those sections of the network defined as the Trans European Rail Freight Network (TERFN) by March 15, 2008, and to the entire rail network by 2015, for the purpose of operating freight international services.

17. A first step towards interoperability was taken for the trans-European high-speed rail system.15 This network must meet a common set of essential requirements, so as to achieve interoperability, improved safety, and reduced environmental nuisance.

18. The cost of harmonizing with the acquis, both in terms of building capacity to take on the obligations of membership and meeting the standards for infrastructure enhancement, can be high for applicant and candidate countries. One recent estimate is that the fiscal cost of harmonizing with the acquis averaged 3.2 percent of GDP annually in the EU8 countries16. Whilst the respective national timetables for movement towards membership partially alleviate some of these concerns, an inherent conflict exists between a country wishing to progress quickly towards membership and improve their core transport networks, and their capacity to implement and pay for the required reforms, given their respective fiscal space.

CORE RAILWAY NETWORK IN SOUTH EAST EUROPE

19. The concept of a core network, or strategic network, for transport infrastructure in the five countries was originally proposed by the European Commission in its Strategy Paper17, published in October 2001. This paper detailed the guiding principles for the definition of the SEE strategic transport network', and added that priority was to be given to the use of existing infrastructure, by repairing and rehabilitating it, and upgrading or new infrastructure components should be kept to a minimum (authors emphasis).

20. This paper was followed by two studies. The Transport Infrastructure Regional Study (TIRS)18, covering Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Serbia and Montenegro, and Romania was completed in March 2002. The TIRS reviewed the SEE

15 Defined in Annex 1 of the same directive. 16 World Bank (2005h). 17 European Commission, (2001), Transport and Energy Infrastructure for South Eastern Europe. Brussels. Available from: http://europa.eu.int/comm/ten/infrastructure/doc/tren_se_en.pdf. 18 Louis Berger SA (2002).

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governments19 plans for establishing the basic regional infrastructure network and offered a first technical elaboration of a long term development plan for the Core Network. It included recommendations on the nature of investments in the various sectors (e.g., rehabilitation rather than development investments, sustainable funding of maintenance, and sector reform issues). The TIRS also provided a multi-criteria assessment of proposed transport projects, a priority ranking of these projects, and a short/medium/long term investment plan for the region.

21. The second study was the Regional Balkans Infrastructure Study - Transport (REBIS)20, funded by the EU under the CARDS Program. It encompassed Albania, Bosnia and Herzegovina, Croatia, FYR Macedonia, and Serbia and Montenegro (including Kosovo) and was completed in July 2003. The REBIS study was conceived as a continuation and deepening of the TIRS, (according to the interpretation of the ISG21). It aimed to assist the Balkans countries to develop coherent strategies for transport infrastructure development and identify priority investment in transport infrastructure. According to the REBIS study, an estimated US$14.5 billion (12 billion) was required to upgrade the core railway network to a level compatible with forecast traffic by 2015.

22. A Memorandum of Understanding (MoU) on the development of the South East Europe Core Regional Transport Network, was signed on June 11, 2004 in Luxembourg. The signatories included the European Commission, the Governments of Albania, Bosnia and Herzegovina, Croatia, FYR Macedonia, Serbia and Montenegro, and the United Mission in Kosovo (UNMIK) for Kosovo, which remains under international administration according to United Nations Security Council Resolution 1244.

23. The MoU defined in broad but clear terms the alignments of the network and the fields in which cooperation will be carried out. It also envisaged the establishment of a regional mechanism for coordination a Regional Steering Committee (RSC) composed of junior Ministers or senior civil servants from the signatory countries and the European Commission. The RSC would stimulate and monitor the action needed to implement the goals of the MoU in practice, and report back to the ministers at their regular meetings. The RSC will be composed of members who are well-anchored in their national administrations and able to ensure that the Core Network is fully integrated in the national transport plan and the infrastructure budget of their countries.

24. The Core Network, as defined in the MoU, comprises 4,300 km of railway lines and 6,000 km of roads. It includes the Pan-European Corridors within the region (the backbone of the core network), adding to these the interconnections between the five capitals of the region and the cities of Banja Luka, Podgorica and Pristina. It also links these with the capitals of the neighboring countries and provides connections with the Adriatic ports of Rijeka, Split, Dubrovnik, Ploce, Bar, Durres, and Vlore. 19 The TIRS encompassed seven countries Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Yugoslavia, Macedonia, and Romania (e.g., also two EU candidate states). 20 Cowi (2003). 21 ISG (2003), Developing Regional Infrastructure Strategic Approach and Implementation of Projects, Stability Pact Regional Table, Thessaloniki December 16, 2002.

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25. The MoU also provides for the establishment of a South East Europe Transport Observatory (SEETO), headquartered in Belgrade. Important functions are expected to be collection of data, preparation of annual and multi-annual work plans for the implementation of the projects defined in the REBIS Study (Core Network), and coordination with the existing task forces on specific transport corridors.

26. The next section provides an overview of the macroeconomic context for the SEE countries. Given the limited fiscal space described, the development of the core network to a defined European standard not necessary for national needs, would be imprudent.

MACROECONOMIC CONTEXT

27. In the last ten years, the countries of the Western Balkans have endured political turmoil, civil unrest and military strife. These events have had a significant impact on the direction and volume of trade and passenger flows in the region, which were still recovering from the upheaval engendered by the break-up of the Former Soviet Union (FSU) and the concomitant changes in the orientation of the regional economy.

28. Since the end of the Kosovo crisis in 1999 and the emergence of political stability, good fiscal progress has been made in all the countries of the region. All are in the process of transition, undertaking significant fiscal adjustment as they seek to move to a path of sustainable growth. Previous high debt has been reduced and restructured, and the countries have committed themselves to a path of fiscal responsibility as one of the key ingredients in the recovery process. Consolidation is also necessary to prepare the ground for future entry into the European Union (EU), including the requirement to take on the obligations of membership, under the acquis communataire, as discussed earlier.

29. Fiscal consolidation in the West Balkan countries has been largely achieved through expenditure cuts, which are advancing at an uneven pace throughout the region. After impressive progress in most countries in 2004, fiscal trends display different profiles in 2005, with public deficits expected on average at 2 percent of GDP after grants (see Figure 2).

19


Figure 2 Fiscal deficit in the Western Balkans countries 2000-2007 (% of GDP)

-10%

-8%

-6%

-4%

-2%

0%

2%

2000

2001

2002

2003

2004

2005

2006

2007

AlbaniaBosnia & HerzegovinaCroatiaFYR MacedoniaSerbia & Montenegro

Source: Study data

30. In 2004, real GDP growth resumed to 5 percent in the region and is projected to remain at a regional average of almost 5 percent in 2006 (see further Table 2). The main positive changes against the performance of 2003 come from Bosnia and Herzegovina and Serbia and Montenegro. Albania remains on a sustained growth track, with projected GDP growth of around 6 percent.

Table 2 Western Balkans Countries Actual and Projected Real GDP Growth 2002-2006 (%)

2002 2003 2004 2005 2006 Albania 3.4% 6.0% 5.9% 6.0% 6.0% Bosnia & Herzegovina 5.3% 4.0% 5.7% 5.4% 5.7% Croatia 5.2% 4.3% 3.8% 3.4% 3.9% FYR Macedonia 0.9% 3.5% 2.4% 3.8% 3.7% Serbia & Montenegro 3.8% 2.7% 7.2% 4.6% 4.8% Regional average 3.7% 4.1% 5.0% 4.6% 4.8%

Source: IMF, World Economic Outlook 31. Despite this positive outlook, a recent study22 noted that key vulnerabilities remain. These include high or very high debt to GDP ratios23 (except for FYR Macedonia), current account deficits and external financing needs (all countries), government expenditures relative to GDP (except Albania), and external debt to GDP (SaM). These vulnerabilities are

22 World Bank, (2005). 23 Serbia 58.4% Public Debt and Interest Payments as a % of GDP, Bosnia 78.1%, Albania 55.6%, Croatia 53.7% in 2004, compared to an average amongst the EU7 countries of 31%.

20


expected to decline only gradually, through continued fiscal consolidation efforts and structural policy reform. External financing needs are expected to remain high, and new gross borrowing, including for servicing and refinancing current loans, will be contracted on hardening terms. Prospective pre-accession costs as well as the need to meet future EU fiscal targets will also need to be factored into fiscal sustainability calculations.

32. Given this fiscal situation, the level of public funds spent on railways is a serious concern. As discussed in paragraph 110, the level of subsidy for Western Balkans railways is comparable to benchmark European railways. Nonetheless, given that the state sector is overlarge in Western Balkans countries, and that governments have many other pressing priorities, a European level of subsidy for railways is not affordable. The World Bank and other International Financial Institutions (IFIs) need to ensure that their lending remains prudent and supports high yielding investments which help the railways to improve efficiency and reduce costs. For this reason, any proposed investment must be carefully scrutinized and found to satisfy quality standards within an adequate framework of sectoral reforms, regulation, and cross-country cooperation. Even after these microeconomic criteria have been met, lending decisions will also need to take into consideration the countrys macro-fiscal constraints and capacity to incur additional debt. Investments which meet these criteria should help shrink railway subsidy over time, gradually reducing the governments financial commitments for railways, while improving economic efficiency and growth prospects.

21


THE RAILWAYS OF THE WESTERN BALKANS REGION

33. This chapter describes the railways of the Western Balkans region. It discusses the freight and passenger traffic handled by each railways and the potential for traffic growth. The chapter describes the physical condition of each railways infrastructure and other assets. It discusses the investment and restructuring issues that are particular to each of the railways.

ALBANIAN RAILWAYS (HSH)

34. Albanian Railways (HSH) operates 441 km of single track lines that link the capital Tirana, the port of Durres, and most of the larger towns and industrial sites in Albania. The railway was built primarily to serve heavy and extractive industries, which in the 1980s included copper, chrome, coal and oil extraction. These industries are now closed, and the impact on traffic volumes can be seen in Figure 3 below. The railways largest current traffic flow is imported clinker from the port of Durres to Fushe Kruje, and this is expected to cease in 2006 when an upgrade to the cement factory in Fushe Kruje is completed.

Figure 3 Traffic Carried by Albanian Railways (Million Traffic Units)

Albanian Railway Traffic

0

250

500

750

1,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Traf

fic U

nits

(mill

ions

)

Passenger-kmTon-km

Source: Study data

22


35. Prospects for new traffic are quite modest. Port traffic is expected to grow. But as much of this traffic is destined for Tirana, a short distance from the port, it is likely to continue moving by truck. A copper wire plant may possibly be built near Shkroder and a steel plant operates at Elbasan, but the railway has not secured any of this traffic. HSH typically operates three freight trains per day, based in Durres, Ballsh and Shkoder. (See the map on the following page.)

36. The railway also operates two passenger trains per day in each direction between Tirana and Durres, Shkoder, Vlore, Pogradec and Elbasan, with most of the passenger journeys being between Tirana and Durres. (See Figure 3 and map on the following page.) Passenger traffic is much reduced from previous years. Both passenger and freight traffic have experienced increasing competition from road, due to elimination of communist government limitations on road use and vehicle ownership and construction of good quality roads. Rail passenger service has particularly suffered from bus and minibus competition. Passengers prefer the greater comfort, reliability and frequency of bus/minibus, and the railway now carries only those citizens too poor to be able to afford the bus. Rail now has approximately 3 percent share of the market.24

37. Much of the rail infrastructure is in poor condition, damaged during civil unrest in the early 1990s and not well maintained since due to lack of funds. The exception is the main line between Tirana and Durres, which was modernized and relaid with concrete sleepers and welded rail in 1997.25 Maximum speed on this line is 60 kph. The remainder of the network has speed restrictions of 40 kph, due to track condition, with some section restricted to 20 kph. The signaling system was destroyed during the civil unrest, and the railway operates with a poorly disciplined manual train control system.

38. The infrastructure contains large sections of line that carry a very small share of HSHs limited overall traffic. The line from Elbasan to Pogradec is a significant loss maker, and a recent study estimated that the closure of this line would reduce HSHs operating loss by 45 million LEK (US$ 438,900) per year.26 This is the section containing 20 kph speed restrictions due to poor track condition, so considerable savings would also be realized in future capital investment requirements by closing the line. The line from Fier to Vlore is also a candidate for closure. This would save an estimated 12 million LEK (US$ 117,000) per year, as well as reduce future capital investment needs. All sections of the railway suffer from very low traffic. Few, if any, sections would be viable without government support.

39. The railway has a severe problem with overstaffing. Labor productivity is a dismal 60,676 traffic units per employee. Labor accounts for some 36 percent of operating costs, and is one of the few areas in which the railway has potential to improve productivity. (Closing low density lines will also improve productivity.) HSH currently has 2248 staff. A recent study recommends a staffing level of 750 as appropriate, given current operations.27

24 Louis Berger, (2004) p. ES-11. 25 Passing tracks at stations on this line remain in poor condition. 26 Scott Wilson, (2005) p. 81. 27 Scott Wilson, (2005) p. 77-78.

23


Figure 4 The Railway Network of Albania

24


40. Another option to reduce subsidy requirements is for the government to evaluate carefully the services that it wishes to buy from the railway, and eliminate those that do not have a high economic/social value for money, such as services with very low patronage. The government should consider whether these services could be provided more cost effectively through support for tendered bus services.

41. Indeed, the key in Albania is to identify where, if anywhere, the railway can offer profitable freight services or high value-for-money passenger services, and redesign the network and the services to serve those market segments. A recent study recommends focusing HSH on improved commuter service between Durres and Tirana, together with marketing freight services to potential large industrial customers and import traffic coming from Durres and Han I Hotit. The recommendation to focus on Durres-Tirana commuter traffic was based on an evaluation of traffic potential, not a cost-benefit analysis, so a more complete analysis is needed before any significant investment is made in this line of business. Improving the service in this corridor would, at a minimum, require investment in better rolling stock, either second hand DMUs or improved locomotives to complement the refurbished InterRegio coaches already being acquired.

42. GE Transportation Systems (GETS) has made a $82 million rail investment proposal to the Government of Albania. The proposed GETS project has three main components. First, GETS would renew the line from Durres to Tirana and install new signaling. Second, GETS would construct a new six km line to the Rinas Airport and a simple canopy shelter and covered walkway at the airport. Third, GETS would supply rolling stock to operate the Durres-Tirana and airport services, consisting of four new GE diesel locomotives28 and 12 used coaches. The cost of the proposed project is US$82 million, which is over 1 percent of Albanias estimated 2005 GDP. The World Bank has serious concerns about this project, as it proposes to spend significant funds on a service with modest likely benefits. By contrast, the Albanian National Transport Plan recommends that the government fund railway capital expenditures totaling US$6-12 million between 2004 and 2013. This amount appears to be more in line with the modest volume of traffic carried by the railway.

THE RAILWAYS OF BOSNIA & HERZEGOVINA (ZFBIH AND ZRS)

43. The railways in Bosnia and Herzegovina have a complex structure that results from the countrys difficult history. Before 1991 the railways in Bosnia and Herzegovina were part of the Yugoslavian railways. When Bosnia and Herzegovina separated from Yugoslavia in 1991, an independent state railway company was formed. Following the Dayton Agreement of 1995 which concluded the subsequent conflict, the state railway company was divided into three regional state owned companies that reflected the ethnic divisions of the country. In 2001 the Federation of Bosnia and Herzegovina adopted a new railway law which merged the railways in the Croat and Bosnian parts of the country, but the railway in the Serbian part, the Republika Srpska, remains separate. A public state-level railway corporation was

28 Model C20-EMPi.

25


established in 199829, to act as coordinating and regulating body between the entity bodies. Thus, today the country has two railways, one within each of the entities, and a state level coordinating body:

Zeljeznice Federacije Bosne i Hercegovine (ZFBiH), the railway in the Federation of Bosnia and Herzegovina,

Zeljeznice Republike Srpske (ZRS), the railway in the Republika Srpska, and

Bosne i Hercegovine i Bosanskohercegovacke Zeljeznicke Javne Korporacije (BHZJK),

the state-level coordinating body. 44. Figure 5 reveals the impact of the conflict on rail traffic, from which the railways are only beginning to recover. Passenger traffic is mostly local and concentrated in a few main city pairs. For ZFBiH, the main city pairs are Sarjevo Konika and Visoko Zenika. For ZRS, the main city pairs are Doboj Banja Luka and Prijcidor Bosanska Novi. Passenger traffic remains at only 4 percent of the 1990 volume.

Figure 5 Traffic Units carried on Bosnia and Herzegovina Railways (1990-2004)

Bosnia & Hezegovina Railway Traffic

0

1,000

2,000

3,000

4,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Traf

fic U

nits

(mill

ions

)

Passenger-km, allPassenger-km, ZFBHPassenger-km, ZRSTon-km, allTon-km, ZFBHTon-km, ZRS

Source: Study data

29April 1, 1998: Agreement between the Federation of Bosnia and Herzegovina and the Republika Srpska on the establishment of a joint railway public corporation in accordance with Dayton Peace Agreement, Annex 9 signed in Dayton, Ohio on November 21, 1995.

26


Figure 6 The Railway Network of Bosnia and Herzegovina

27


45. Freight traffic has recovered to about 15 percent of its 1990 level. ZFBiH freight traffic is characterized by significant volumes of heavy industrial products (e.g., coal, metals) moving for short distances. (Average haul distance is 46 km.) Before the war the main customers of the railway30 were the steel plant of Zeljezarera Zenica, the coal mines of the mid-Bosnian basin and the cokery at Lukavac. The future traffic trend therefore is highly dependant on the recovery of these main customers and other industrial actors. The railway is likely to see a large increase in traffic volume from the sale of a 51 percent interest in the Zenica steel works to Mittal Group. This could result in a traffic increase of 2.5 million tons, or about 50 percent for ZFBiH.31 A map of the network is provided in Figure 6.

46. ZRS freight traffic is more internationally oriented, and average distance is somewhat longer (78 km). Before the war, main customers of the railway were coal mines and chemical industries near Tuzla. These industries have yet to significantly recover. ZRS should see a boost in traffic from the recent sale of a 51 percent interest in the RZR Ljubija iron ore mine to LNM Group, which has pledged to reopen the mine.

47. The railway infrastructure consists of 1,042 km of track, most of which is single line and electrified. Traffic density is quite low, at 861,000 traffic units per km for ZFBiH and 509,000 for ZRS. The infrastructure was badly damaged during the conflict and suffered from lack of maintenance and investment during the 1990s. However, EBRD and EIB have been financing rehabilitation of main lines.

Table 3 Network size and length of electrified line for ZFBiH and ZRS (YEAR)

ZFBiH ZRS Total Track-km 608km 424km 1042 Electrified lines 73% 80% 75% Double track lines 11% 5.6% 9% Traffic Units/track-km 861,111 509,470 648,996 Source: WB-IPSA 2003 and UIC

48. Together, the two railway companies employ 7,400 persons (3,900 for ZFBiH, 3,500 for ZRS).32 This compares to approximately 14,000 before the conflict. With current traffic volumes at a fraction of pre-conflict levels, employee productivity is a poor 105,000 traffic units/employee for ZFBiH and an even lower 59,000 for ZRS.

49. ZFBiH and ZRS are both significantly loss makers, with cost structures that are disproportionate to the current traffic volumes and revenues. Their operating revenues come primarily from freight traffic. ZRS is particularly dependent on subsidiesbudget support representing 70 percent of revenue.33 The working ratio without subsidies is over 300 percent for both railways.

30 SEK, SwedeRail, IPSA (2001), Project Scoping for Railway Rehabilitation. 31 Personal communication with a representative of Mittal Steel, May, 2005. 32 According to UIC statistics for 2003. 33 REBIS, (2003).

28


CROATIAN RAILWAYS (HZ)

50. Hrvatske eljeznice (HZ) is a state-owned railway company, created in 1991. HZ operates a 2,726 km rail network, of which 248 km are double tracked and 116 km electrified. The core main lines encompass about 850 km. Traffic density is low with 980,000 traffic units per track-km. The REBIS study34 considered the railway infrastructure to be in medium to good condition on main lines. The dissolution of the former Yugoslavia and the subsequent unrest has had a negative impact on HZ traffic volumes. In 1991, freight and passenger traffic dropped 76 percent and 72 percent, respectively and remains less than half of its former level. (See Figure 7.)

Figure 7 Traffic Carried by Croatian Railways 1990 2004 (Million Traffic Units)

Croatia Railway Traffic

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Traf

fic U

nits

(mill

ions

)

Ton-kmPass-km

Source: Study data. 51. HZ carries about 11 percent of total freight moved in Croatia, with road and water modes providing the main competition.35. Freight traffic volume has been increasing from its low in the mid-1990s, but leveled off in 2004. HZ attributes its flat performance in 2003-2004 to system capacity constraints caused partly by the progression of track overhaul works. HZ has a mixed traffic base with about 30 percent domestic moves, 34 percent transit, 16 percent export and 20 percent import. The three main commodity groups transported in 200336 were minerals (23 percent) metallurgical product (17 percent) and petroleum products (13 percent). HZ expects its freight traffic to increase by 30 percent during the period 2005-2009.

34 REBIS, (2003). Appendix 1. 35 Central bureau of statistics, Statistical Information 2004. 36 UIC data.

29


Figure 8 The Railway Network of Croatia

52. Passenger traffic has gradually recovered since 1997, and the number of passengers is now close to its 1990 level. However, the nature of the trips taken has changed, with a marked drop in the average trip distance from 85 km to 35 km. HZ expects a 21 percent

30


increase in pass-km transported during the period 2005-2009 from developing a timetable more attractive to clients. Bus services operated by publicly owned carriers are proving to be serious competitors for rail passenger services. In addition the construction of new motorways has enhanced the competitiveness of motor carriage. Passenger ticket revenues represented 33 percent of HZs transport revenues in 2003, but including PSO contracts, passenger traffic produced 55 percent of total HZ revenues.

53. Between 1998 and 2004, HZ reduced its staff from 23,000 to 14,000 through natural attrition and voluntary and involuntary retrenchment. However 46 percent of the retrenched staff were actually transferred to subsidiaries. Productivity has increased gradually since 1997 to reach 269,000 TU/employee in 2004. HZ expects a leap in productivity to up to 405,000 TU/employee by 2009 through the unbundling of HZ and a staff rationalization program. HZ forecasts 12,311 employees by the end of 2009. Labor costs represented 44 percent of the operating costs in 2004 and increased by 6 percent compared to 2003.

UNMIK RAILWAYS, KOSOVO

54. UNMIK Railways (UR) manages the railway infrastructure in Kosovo and operates both passenger and freight services. Railway operations were under the control of military forces (KFOR) from August 1999 to March 2001, but are now under the control of the United Nations Mission in Kosovo. Rail has the status of a protected mode, due to the service it offers to ethnic minorities in the country. UR has an unusual legal situation, being a publicly owned enterprise, but not a legally constituted as a company.

55. UR operates one passenger service called the Freedom of Movement Train. The purpose of this train is to provide safe transport between minority Serbs and Roma enclaves in Kosovo. This train operates twice daily along URs north-south line from Hani I Elezit on the Mecedonia border to Lashak on the Serbian border. (See map on following page.) It also has twice weekly service to Gracanica near Pristina. Drivers for the train are expatriates (Canadian and Kenyan) and paid by grants from UNMIK. The train is operated on contract with the Ministry of Finance and Economy, based on an agreed rate per km for the locomotive and passenger carriages used.37 Passengers are charged a flat rate of US$0.60 (0.50).

56. In the 1980s the railway lines in Kosovo carried about 3 million tons per year. Following the conflict and military intervention, traffic dropped to a very low level. UR carried 265,000 tons (18 million ton-km) in 2004. Nearly 90 percent of URs freight traffic is imports, primarily petroleum from Macedonia. Some building materials and general cargo are also carried.

37 Deloitte p. 18.

31


Figure 9 Rail Network of Kosovo (shown within Serbia)

32


57. The railway established a new container terminal at Fushe Kosove Miradi in September 2004, and is expecting that facility to generate additional cargo. Significant traffic volume increases, however, will depend on the reopening of mining facilities in the region. The railways business plan notes that the privatization and reopening of Feronikl could generate as much as a million tons per year of traffic.38

58. UR consists of 333 km of singe track, non-electrified, standard gauge line. The terrain is mountainous, with steep slopes and sharp curves. As shown in the table below, the north-south line is open, with both passenger and freight service operating over it. Little traffic is interchanged with Serbia, at the northern border. The Western line is open to Peja, but carries only occasional freight traffic. The branch of the Western line from Kline to Prizen is not operating. The Eastern line is open to Bardosh (Pristina) and carries freight traffic. Beyond Bardosh, the Eastern line is not in operation.

Table 4 UNMIK Railway Lines in Kosovo

Line

Section Year Built

Length (KM)

Staffed Stations Status

South Hani I Elezit KF 1874 62.8 8 Open for cargo & passenger

North FK Lersak 1874/1931 78.5 8 Open for cargo & passenger

West FK Peja 1936 81.2 3 Open for cargo, one train per week Kline Prizen 1963 58.3 2 No operation

East FK Bardosh 1934 14.2 1 Open for cargo

Bardosh Medare 1949 38.0 -0- No operation

Total 333.0 22

Source: UNMIK Railways Business Plan, p. 8. 59. Traffic density is quite low, about 154 thousand traffic units per km for the entire network, or 217 thousand traffic units per km on the operating network. Given the low traffic level, UNMIK Railways is sensible to leave the East and West lines in a closed or semi-closed condition, spending minimal funds on their maintenance and operation. Once the political status of Kosovo is resolved, UNMIK Railways will be better able to assess the traffic prospects for these lines and decide on permanent line closures.

60. The railway infrastructure was significantly damaged during the conflict. KFOR reconstructed the north-south line and the western line to Peje, repairing damaged rails and sleepers and reconstructing bombed stretches of railway bridges. Two rail-under-road bridges, bombed in March 2000, have been replaced through Swedish aid. The infrastructure

38 UNMIK Railway, Business Plan, p. 14.

33


remains in poor condition with overage rail and poor ballast.39 UR rolling stock is old and in poor condition, and much of it is parked because it is not needed. As would be expected from such a low density operation, rolling stock utilization is poor.

Table 5 UNMIK Railways Rolling Stock age, productivity and fleet size

Total Fleet In Use

Age (Years) Productivity of In Use Fleet

Locomotives 35 4/1 Over 30 67,264 loco-km/loco

DMUs 3 3 Na 1,801 train-km/DMU

Wagons 538 63 Over 30 291,713 net tkm/wagon

Coaches 50 Na Na 18,485 coach-km/coach

Source: Study Data. 61. UNMIK railways employ 391 persons.40 Even at these modest numbers, staff costs represent about half of total operating costs.41 In December 2004, the railway reached an agreement with the union to further reduce staff to approximately 150 by 2007.

62. In 2004, UR obtained about a third of its revenue from freight operations, a third from passenger operations (government PSC) and a third from grants, rentals, demurrage and other. Some 48 percent of expenses are labor. Fuel represents 19 percent of expenses, while materials and maintenance expenditure is only 13 percent. Depreciation is also quite low, due to accounting irregularities.42 With the PSC for passenger and the grant operating income, UR operations have been breakeven. The negotiated reduction in staff will likely allow UR operations to remain break even if operating grant funds reduce and maintenance expenditures increase.

63. UNMIK Railways is run in a fairly commercial manner, given its difficult political situation. The main issue in the railway providing good value for money, is that it must keep its capital investment needs in proportion to its tiny traffic base.

MACEDONIAN RAILWAYS (MZ)

64. The Macedonian Railways Public Enterprise, Makedonski eleznici (MZ) was established after The Republic of Macedonia declared its independence in September 1991. MZ is a public state enterprise, which conducts transport operations and manages state owned rail infrastructure and rolling stock. In April 2005, the Parliament adopted a law 39 Swederail, p. 4. 40 UNMIK Railway, Business Plan, p. 22. 41 Estimated at 150,000 traffic units per employee. This indicator is inflated by the higher rates paid to contract drivers, but overall staff productivity is nonetheless low. 42 UNMIK Railways has not accounted for property, plant and equipment and spare parts which were acquired prior to the 1999 conflict in Kosovo and are still presently in use. Such assets include land and buildings and the railway network infrastructure. Deloitte, Independent Auditors Report.

34

http://www.geocities.com/CapeCanaveral/3976/macedonia.html


establishing the separation of MZ into an infrastructure manager, Public Enterprise for Railway Infrastructure "Macedonian Railways," and a transport operation company, Joint Stock Company for Transport "Macedonian Railways Transport Joint Stock Company." A Law on Railways was adopted in July 2005 that provides for infrastructure access and compensation for loss making passenger services.

65. Passenger traffic declined significantly in the early 1990s. With less than 100 million pass-km in 2004, passenger traffic is at less than a third of the 1991 level. Freight traffic decreased by 57 percent during the 1990-2002 period, and is just beginning to recover. The unstable political and thus economic situation of Macedonia is the largest factor in this trend. In 1994-1995, when Greece imposed a trade blockade, freight traffic reached its lowest point with only 150 millions ton-km (1994). In 2002 traffic volume shrank by almost 30 percent, due mainly to the opening of an oil pipeline to Thessalonika and the consequent loss of oil traffic. In 2003 and 2004, freight traffic recovered, resulting in a 13 percent growth compared to 2002. Freight accounts for roughly 80 percent of physical traffic (in traffic units) and over 90 percent of total transport revenue. Market share is low, with rail handling only 9 percent of the freight market.

Figure 10 Macedonian Railways Traffic Carried 1990-2004 (Million Traffic Units)

Macedonia Railway Traffic

0

250

500

750

1,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Traf

fic U

nits

(mill

ions

)

Passenger-kmTon-km

Source: Study data 66. The MZ network encompasses some 699 km of track, with an additional 225 km of station and yard track. It operates over an additional 160 km of lines, which belong to industries. The network is single track, and only the line from Tabanovce and Gevgelija (233 km) is electrified. Main lines are in reasonably good condition, with operating speeds on the north-south corridor of 90-100 kph for passenger and 75-80 kph for freight. On Corridor X, design operating speed is 100 kph, but due to a backlog in maintenance, speed restrictions ranging from 55 kph to 90 kph are in place on 87 percent of the corridor.

35


Figure 11 The Railway Network of Macedonia

36


67. MZs traffic is dominated by a handful of customers, including MITTAL and MAKSTIL iron plants located in Skopje, the iron plant SILMAK located in Jegunovce and the newly opened Smelting plant located in Skopje. These customers traffic moves on the main north-south corridor toward Thessalonica or to Tabanovce. Nearly all MZs traffic is international (export, import or transit), and transit represented 42 percent of the traffic (tons) in 2004. MZ forecasts transit to grow by 15 percent for the period 2004-2009. Freight volume is forecast to increase by 41 percent in the 2004-2009 period reaching 3.5 million tons in 2009, due mainly to steel traffic. The MZ Business Plan forecasts 2008 freight traffic to be dominated by metal products and container transport.

68. The level of staff has decreased significantly, from 9200 in 1990 to 3600 in 2004 as a result of natural attrition and retrenchment. At 134,380 traffic units per employee, however, labor productivity is lower than in most Central and Eastern European countries, and far below that of the EU15 railways. Thus, despite low wage levels, labor costs are nearly half of operating costs. MZs retrenchment program schedules that by May 2005, 755 employees will leave the company. By mid-2007, technological improvements will allow another 400 staff to be retrenched. With a forecast traffic increase of 25 percent, this will bring the productivity to 240 000 TU/employee by 2009. The labor costs would then account for about 30 percent of the operating revenue.

69. MZ is one of the largest money losers among Macedonian public sector enterprises. Total debt at the end of year 2004 was US$173 million (3.3 percent of GDP). MZs net income has been highly negative and losses have risen sharply from MKD 278 million (US$5.4 million) in 2000 to about MKD 1 billion (US$19.7 million) in 2003. With traffic and revenue growth as well as reduction in depreciation in 2004, the deficit was reduced to MKD 620 million (US$12.3 million) in 2004. It is estimated that if railway reforms are not undertaken, the cost to the government will increase by another US$120 million to cover operating losses (excluding required budget support for capital expenditures) in the next ten years.

MONTENEGRIN RAILWAYS (ZCG)

70. Zeleznice Crne Gore (ZCG) operates a 330 km railway on the territory of Montenegro. ZCG operates a 167 km main line that connects the port of Bar on the Adriatic Sea to Podgorica and on to the administrative border with Serbia (the line continues on to Belgrade). This line forms an X with an 83 km second line that connects Niksic (site of a bauxite mine and iron foundry) to Podgorica and extends to the Albanian border. The heaviest volume of traffic is on the Niksic-Podgorica section, with the next highest volume on the Podgorica-Bar section.

71. ZCG has very low traffic volume, about evenly split between passenger and freight when measured by traffic units. (Passenger trains account for 84 percent of train-km, however.) In 2004, ZGC carried 1.2 million passengers (94 million passenger-km). This was down 10 percent from the passengers carried in 2003, 44 percent fewer than in 2001, and less than half the passengers carried in 1989. The railway forecasts that passenger totals will shrink another 10 percent in 2005 to some 1.1 million.

37


72. Most of the railways passenger traffic occurs on the railways main north-south line, with Bar, Podgorica and Bijelo Polje stations generating about 95 percent of the volume.43 Average distance traveled is about 100 km. During the summer the Podgorica-Bar line carries tourist traffic to the coast.44 ZCG competes with bus and private automobiles, and holds rail prices lower than bus prices.45 Price per passenger-km has more than doubled since 2001, however. Airlines are not much of a competitive factor for the relatively short distances that rail passengers travel.

Figure 12 Montenegrin Railways Traffic Units Carried 1990-2004 (Million Traffic Units)

Source: Study data

Montenegro Railway Traffic

0

250

500

750

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73. ZCG carried a millions tons (94 million ton-km) of freight traffic in 2004. The largest source of freight traffic is Rudnici Boksita Niksic (RBN), a bauxite mine with capacity of 900,000 tons per year, located at Niksic. The bauxite is transported to Kombinat Aluminijuma Podgorica, an aluminum processing facility with capacity of 240,000 tons per year.46 Ores and ferrous metals dominate domestic traffic. Petroleum products are the main import, while chemicals are the main export. Figure 12 reveals that freight traffic fell sharply in the 1990s, reflecting the regional difficulties (the RBN mine was shut down briefly in 1994). In the last year traffic grew substantially, but from a very low base. While imports remained flat, domestic traffic grew 27 percent, export more than doubled and transit grew from almost nothing to 8 percent of traffic volume.

43 Rebis Study, p. 55. 44 Serbian Railways reports that the line carries significant summer tourist traffic from Serbia as well. 45 Rebis Study, p. 55. 46 Bauxite Mines Seek a Strategic Partner, www.pmcomm.com/montenegro/mining.htm.

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Figure 13 The Railway Network of Serbia and Montenegro

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74. ZCG lines are standard gauge and single track. The line to Bar is electrified. The terrain is mountainous and the line has numerous bridges and tunnels. Traffic density is very low with less than a million traffic units per track-km. The north-south line is in barely satisfactory condition, and needs rail and sleepers to be replaced in about 40km. The line from Podgorica to Niksic is in poor condition and needs repair urgently.47

75. ZCG operates in very mountainous territory, which makes operating costs high. Its low volume means that density of traffic on the network, i.e. productivity of infrastructure, is low. The rolling stock is aging and in need of renewals, but utilization of active fleet appears reasonable.

76. ZCG employs some 1800 staff. Employee costs were over 10 million in 2004, and account for nearly half of total operating costs (including depreciation) and well over half of cash operating costs. ZCG labor productivity is very low by international standards, at an estimated 114,000 traffic units per employee. For example, ZCG employs more than 1 track maintenance staff per track-km and 5 locomotive maintenance staff per active locomotive/EMU. This is despite a 21 percent reduction in staff over the last 10 years.48

77. ZCG can address some of its productivity issues directly through trimming staff and unneeded secondary track. But much of its ability to be effective depends on increasing traffic. Some modest possibilities exist locally, with development of industrial traffic, trade from the port of Bar and tourist business. Substantial increases, however, depend on development of broader trade, as internal Montenegro traffic generation is small and road is very competitive for short distances.

78. ZCG is not financially sustainable without subsidy. Passenger traffic is loss making and freight traffic perhaps breaks even. The railway depends on government subsidy for half its revenue and all capital investment. To bring its costs into balance with the value of the services it provides, the railway must reduce operating costs, particularly labor, increase compensatory traffic, and carefully screen/prioritize investments.

SERBIAN RAILWAYS (ZS, FORMERLY ZTP)

79. Zeleznice Srbije, or Serbian Railways (ZS) is the state owned enterprise in Serbia. It was created on 1 March 2004, when a new railway law and decree on reorganization of the railway were enacted. The operating assets of the former railway ZTP were transferred to ZS. The decree stipulates that ZS will have four divisions (infrastructure, freight, passenger and rolling stock maintenance), and funds may not be transferred between divisions.

80. The new railway law indicates that public rail infrastructure is owned by the Republic and open to all licensed rail transporters. Initially, ZS will be the public rail infrastructure manager but the law allows for licensing of other infrastructure managers. Similarly, the law

47 Republic of Montenegro, Infrastructure Development Program, www.donors.cy.yu/economic_reform/infrastructure.htm, accessed April 21,2005, p. 2.. 48 Ibid.

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allows for multiple rail operators, of which the ZS freight and passenger units will be only two.

81. Rail provides approximately 5 percent to 10 percent of public passenger transport in Serbia.49 As shown in the figure below, Serbian rail traffic has declined fairly steadily since 1990 to 985 million passenger-kms in 2004. Domestic intercity movements comprise the bulk of passenger traffic (78 percent) and estimated passenger revenue (76 percent). International trains, with higher fares produce 16 percent of revenue on 7 percent of traffic. Beovoz (commuter) is the least compensatory traffic, providing 8 percent of revenue on 16 percent of traffic. Domestic rail rates are about 30 percent lower than bus fares. Nonetheless, bus is generally preferred because of its superior comfort, reliability and frequency of service.50

Figure 14 Serbian Railways Traffic Units Carried 1990-2004 (Million Traffic Units)

Source: study data

Serbia Rail

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